CEOs of Kraft Foods, Sara Lee missing ingredients for turnaround

Irene Rosenfeld, Brenda Barnes see some success but face major challenges

February 15, 2009|By Mike Hughlett, Tribune reporter

Kraft Foods Inc.'s Irene Rosenfeld and Sara Lee Corp.'s Brenda Barnes joined their companies a few years ago with similar missions: turn around firms with a trove of well-known brands but with lingering reputations as underachievers when it comes to increasing sales and profit.

Each chief executive has seen some success. Kraft and Sara Lee, known for such not-so-sexy staples as cheese and bread, have burnished their reputations for innovation. Last year, both pleased Wall Street by successfully passing down their soaring commodity costs to consumers. Kraft's sales grew at the healthiest rate in years.

But this week, as Rosenfeld and Barnes stand before a giant food business confab in Florida and give annual progress reports, they face major challenges, particularly Barnes.

Sara Lee, its stock the packaged-food industry's biggest laggard, is facing a grim downturn in what has been its crown jewel market: Western Europe.

Meanwhile, the deteriorating U.S. economy threatens both companies with the specter of cash-strapped consumers shifting to cheaper private-label foods and away from name brands.

For both firms, "there are certainly pockets of success," said Edgar Roesch, a stock analyst at Soleil Securities. "But it seems like one issue or another keeps arising."

The most recent one lies overseas. Kraft, the nation's largest packaged-food company, surprised Wall Street this month by lowering its 2009 profit forecast to $1.88 per share from $2 per share.

The biggest culprit: unfavorable currency swings. The dollar's strengthening against other currencies has hampered companies with extensive international operations, including Kraft.

Still, Northfield-based Kraft, which features Kool-Aid and Oscar Mayer among its products, appears to have momentum as it finishes the second year of Rosenfeld's three-year turnaround plan, some experts said.

Rosenfeld, who took over the top job at Kraft in mid-2006, thinks so.

"We're very much where we want to be," she said in a recent interview. "We are doing what we said we were going to do, in a very difficult environment."

Some stock analysts agreed.

"I don't think there is anything [Rosenfeld] has kind of dropped the ball on," said Erin Swanson, a stock analyst at Morningstar Inc. "They are making progress. They are focused on product innovation and marketing."

Cakesters, new snack-cake versions of Kraft's famous cookies, serve up a good example, analysts said. The company rolled out Oreo cakesters in 2007, complete with heavy marketing. It was a hit, so a Nilla Wafer cakester was launched last year, and a Nutter Butter version is on tap for this year. Cakesters are now a $100 million annual business.

Such innovative items, coupled with price increases on some products, helped push Kraft's annual revenue up 17 percent in 2008, to $42.2 billion. In the past year, Kraft's stock has dropped 15 percent, a bit worse than the 12 percent drop in the Standard & Poor's packaged-food stock index, but a lot better than the 40 percent shellacking in the S&P 500.

But Kraft's operating profit margins, a key performance measure, declined in 2008, hitting a five-year low. And its fourth-quarter earnings report included some potentially troubling trends.

First, it appeared to be losing U.S. market share at an alarming rate. Kraft held or gained share in 26 percent of its U.S. retail businesses during the quarter, down from 42 percent to 56 percent over the previous three quarters.

And sales volume, or actual units sold, declined in the quarter. Kraft still posted a nice sales increase, in dollars, because of price hikes. But for Kraft's long-term health, sales volume has to pick up, analysts said.

"We simply cannot square management's enthusiasm for Kraft's operating performance with what we perceive as unsustainable volume and share trends," Morgan Stanley analyst Vincent Andrews wrote in a recent report.

To Andrews, the negative trends are the result of Kraft's heavy exposure to private-label items. Kraft is big in many foods, including cheese, coffee, snack nuts and salad dressing, areas where cheaper store brands seem to be a growing force.

Andrews argues that Kraft's weak volume and market share in the fourth quarter indicate that consumers see too wide of a price gap between Kraft's products and private-label items, so they often are switching to the latter.

But Rosenfeld said recent share and volume downturns "are not representative of the underlying performance of the business." Half of the quarter's market-share loss came from decisions by Kraft to exit less-profitable lines, she said. Plus, consumers in the last quarter felt the cumulative sting of a year's worth of hefty price increases.

Analysts say that private-label pressure, if it increases, will make the last stages of Kraft's turnaround more difficult to execute.

It could crimp Sara Lee's turnaround efforts, too, because it also has a large exposure to private label, though not as great as Kraft.